Offshoring: Pathway to a Competitive Disadvantage

By Frank Wander |
Posted 08-21-2013

Offshoring: Pathway to a Competitive Disadvantage

By Frank Wander

Corporate IT remains a source of great dissatisfaction in many companies. After enduring high project failure rates for more than 50 years, companies should already know that highly competent, tight knit teams are a source of competitive advantage and project success. Companies should know that knowledge workers, and successful teams, are corporate assets, not expenses. Moreover, companies should know that talented professionals are not an interchangeable commodity. Unfortunately, workers don’t count, so everyone just soldiers on.

When I examine how traditional IT operates, the book Extraordinary Popular Delusions and the Madness of Crowds immediately comes to mind. In it, Charles Mackay recounts how otherwise intelligent people get caught up in manias, like the Dutch tulip craze in the 1600s, where, at the height of the fad, a single tulip bulb sold for 10 times the annual salary of a craftsman. It is part of human social psychology that once a herd mentality takes root, most everyone goes along, afraid to speak out, even if they know the situation makes no sense. That is where we have ended up in IT. Many people in the industry quietly say the offshore model is a source of enduring failure, yet it remains a staple of IT.

Offshoring is a tool. Like all tools, it must be used correctly. Offshoring has legitimate uses, and I’ll briefly touch on them later. Generally, it increases the cost of application development and maintenance because it uses a leverage model, where large numbers of inexperienced resources with little to no institutional knowledge are thrown at a problem. Failure rates are high. Productivity is low. The model is the exact opposite of what works. I experienced this firsthand, as a CIO, when one of my managers replaced a team of 50 offshore resources with six full-time, high aptitude employees, and delivered more projects.

The problem with offshoring is that decisions are made using a single factor: dollars per hour of labor. Instead, what should be used is productivity, which is output divided by cost. Someone making $100 per hour can easily be 10 or 20 times more productive than an inexperienced offshore resource that costs $25. Worse yet, vendors get paid for bodies, so they want you to use a lot of them. Vendors also need to make a good margin. Therefore, cheaper resources are more desirable because they produce a greater profit. And therein lies the problem.

Let’s examine the factors that drive IT knowledge worker productivity, so you can make an informed decision about offshoring. Even though some of these factors are not easily measurable, they are still true.

Team Size. Small teams are the most productive staffing model. This has been proven time and again, and I have personally observed it many times. Case in point: In a 2005 study, QSM, an IT consulting firm, compared small and large team outcomes across 564 similarly sized projects (100,000 equivalent lines of source code). The large teams averaged 32 persons, and consumed 178 months of total effort; the small teams averaged 4 persons, and consumed only 24.5 months of total effort to complete the projects. Interestingly, the elapsed time was approximately nine months for the small and large teams. Clearly, the smaller team was much more efficient, but offshoring is designed around larger teams, and it requires more overhead on the domestic side to communicate, manage, design and document everything. These large teams are slow, costly, and unproductive, even at lower rates.

Offshoring: Pathway to a Competitive Disadvantage

Time-to-Competency.This represents the length of the learning curve. Time-to-competency varies based on the complexity of what has to be learned and the aptitude of the talent. Many business systems are complex to grasp, and if you have ever tried to take over an application and modify it, as I have, you know how daunting it can be to unravel the logic puzzle, and learn the business functions. Some complex systems take years to master. A resource who has become an expert on one of these highly complex systems can navigate the code with ease. That individual is a corporate asset, not an expense. You want to hang on to them, because it is very costly to replace their institutional knowledge. Yet, companies still replace proven, highly experienced teams with junior offshore resources who possess no institutional knowledge. Errors like this just keep on giving.

Turnover. At one time, turnover was a key indicator of organizational health. Leaders worried about it, and asked why people were leaving. They knew experience was walking out the door. But now, leaders negotiate contracts where the turnover is built in. Many IT executives have signed contracts with offshore providers where resources are replaced, by design, after 18 or 24 months. Given the long time to competency on many business systems, these contracts ensure novices are often doing the work. Add to this the high voluntary turnover rates found offshore, and you end up with dangerously inexperienced teams.

Institutional Knowledge. Beyond the time-to-competency required to learn a platform, there are many types of institutional knowledge. Institutional knowledge is only acquired on the job, so it has high productive value. It is also the source of incremental and breakthrough innovation. What are the products and services offered, and what differentiates them? What matters in this culture? How does work get done around here? How are the test and production environments set up? What are the firm’s procedures? Who are the key contacts? And so on. This is everything you need to know to be productive, and it is costly to acquire. New workers are therefore unproductive because they have to find their way around. Low levels of institutional knowledge result in a lack of productivity, innovation and a loss of competitive advantage.

High Aptitude Teams. Someone with high aptitude can master something in six months, while someone lacking the proper aptitude will take two years to achieve mediocrity–or never grasp it at all. This is the mythical man month that Frederick Brooks wrote about 45 years ago. By filtering team members over time, you can build a small, high aptitude team. Nothing in IT is more productive, especially when the team is tight knit. Studies have repeatedly shown that the highest aptitude professionals in this business are 10 times more productive than the average professional. Get one of these individuals on the team, and you really have a home run. But you can only build a high aptitude team by carefully recruiting, retaining and growing talent. You can’t do that with offshoring.

Social Capital. IT is a product of mind and emotion, and requires a deeply collaborative group of professionals to produce anything. These aren’t just coworkers, they are co-creators. Social capital is a measure of the sum total of these relationships. If the workers have strong relationships, information flows freely, and work speeds up. However, when work relationships are weak, social interaction is slow, and the exchange of information required to create shared understanding moves at a snail's pace, driving up project costs. A tightly woven group of professionals represent the social fabric of productivity. When work is offshored, the social fabric is torn apart, and it is very difficult to rebuild this across cultures, time zones and continents. Add in the high resource turnover rates, and you have a disconnected group of professionals that are laboring to get work done.

Offshoring: Pathway to a Competitive Disadvantage

Culture and Leadership. Nothing is more effective than a caring culture, where management protects everyone’s back, and employees operate in a productive state of mind. When leaders and workers embrace prosocial behaviors and shun socially corrosive and antisocial ones, the work environment is safe, and it creates an atmosphere where creativity can thrive. By contrast, offshoring creates a culture where protective behaviors predominate, and levels of trust are low. It is an inherently unproductive work environment.

Human Factors. There are other human factors, like meaning, control, mood and so forth, that contribute to productivity. These factors matter a lot, but in an organization where people are regarded as mere parts, the human factors of productivity remain a blind spot. According to recent Gallup studies, most workers are disengaged. The productive loss of human capital is enormous, not unlike an eight cylinder engine running on just two cylinders.

Given the above factors, when does offshoring work? If you have a platform that is in maintenance mode because no new products are being added, go ahead and hire a cheap team offshore to maintain it. For overnight production support, offshoring works very well. Your teams can sleep, and refresh themselves, as the business is kept running. Also, functions with short time to competency, like configuring a Windows or Unix server, is a commodity, and it can be done cheaper with commodity labor. The key is to differentiate between which roles are expenses (short time to competency) and which roles are assets (long time to competency). Companies should reduce expenses and grow assets.

Put simply, the reliance on commodity labor with limited institutional knowledge is slow and unproductive. Companies that have over-embraced offshoring will eventually take back critical business functions as the loss of control, and the damaging lack of innovation, leads to a competitive disadvantage. Offshoring is a tool that will eventually be used the right way. In the meantime, the race to the bottom will continue.

About the Author

Frank Wander, a former CIO, is founder and CEO of the IT Excellence Institute, and author of Transforming IT Culture, How to Use Social Intelligence, Human Factors and Collaboration to Create an IT Department That Outperforms (Wily, 2013). For his previous CIO Insight article, “How Corporate Sociopaths Affect IT Productivity,” click here.